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Should You Lend Money to Family, Friends? Read This First

Over the years I’ve heard from dozens of readers who have lent money to friends and family members, only to have become outraged when the deal goes sour. The problem is they write to me after they’ve made the loan. By now, they’ve been waiting months, even years, for repayment, without success, hoping I can wave a magic wand to get their money back.

I tell these readers that I wish they’d written to me before they lent the money. Doing things right from the start makes all the difference in the end. Here’s how:

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Accept reality

Lend only the amount of money you can afford to give as a gift. Don’t tell your potential borrower this, but know in your heart that if you just hand over the money, the chances of being repaid in full are fairly slim. That’s a fact of life. There’s a reason this borrower is coming to you and not to a bank, conventional lender, or credit card to borrow money.

Promissory Note

This is a legally binding document that when signed by both parties creates a contract. A Promissory Note lays out the details of repayment including total amount to be repaid, due dates, and penalties if the terms and conditions are violated. Search for “free promissory note” online to find a form you can simply print out and fill in the blanks. Word and PDF templates here; eForms.com promissory note templates are a good option.

Reasonable interest

It is right for you and the borrower, that you charge a fair rate of interest. If your borrower balks at being charged interest, blame it on the IRS, which says you the lender will be assumed to have earned interest rate that is at least as high as the IRS Applicable Federal Rate, which is set monthly. Currently, that rate is 0.91%, and changes monthly.

Require collateral

You can require that your borrower “secure” this loan by pledging something of value that he or she owns, which has a perceived value by the borrower of at least the amount of the loan. That could be a Nintendo Switch, watch, or a TV. Whatever it is, take possession of it. Hold it in lieu of repayment.

Include the fact of this collateral in your documentation with a clear statement that once the loan is repaid, the collateral returns to the borrower. And should the borrower default, the collateral becomes yours at your discretion, to liquidate for repayment of the loan.

Formal repayment plan

Because you do not want to become a debt collector and deadbeat chaser, agree on a repayment plan upfront before you hand over the money to your borrower. Do this while everyone is friendly and anxious to make this work. Let the borrower come up with a plan to which you can agree.

A great idea is for the borrower to arrange automatic deductions from his or her bank account to yours. Now you won’t have to wonder if the check is in the mail or if you’ll need to make yet another awkward phone call.

There’s an app for that

Of course, there is! These days isn’t there an app for just about everything?

Zirtue is a free mobile app (App Store or Google Play) and perfect for this kind of transaction. Zirtue is a relationship-based lending mobile platform that allows you to securely lend and borrow money with friends and family. It is perfect for trusted relationships—people who want to help—not take advantage—of one another.

Zirtue lets the two of you set up a formal repayment situation. The borrower pays you 5% interest on the loan and makes the automatic monthly payments you agree from his or her bank account, directly into yours. You, the lender, do not pay any fees at all, however, the borrower must pay a small monthly fee. And isn’t that right? The borrower needs to learn about how the real world operates! Borrowing money is not free. A formal lending situation between the two of you will be good for both of you.

Check out Zirtue before you make your decision on whether to lend money to this friend or relative. Knowing ahead how it works will help you make a good decision for whether or not to move forward with the making that loan.

First published: 4-28-13; Updated with current information and the new Zirtue App: 4-9-20

Question: Have you ever lent money to a friend or family member? Or were you the borrower? How is that working out for you? Share in the comments below.


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  1. Loretta says:

    I really appreciate Everyday Cheapskate. I often wonder where you get your bright ideas.

    I have loaned money but with the attitude that if I never saw the money again it wouldn’t destroy our friendship. I loaned money last year to a friend that had the plan all laid out how and when he was going to pay it back. Instead of getting total payment in July as promised, I finally got the final payment 2 weeks ago with more than fair interest. I wasn’t the least bit concerned about him paying it back. I was just concerned that if anything at all had happened to him, I had no collateral at all so I’d have been out of luck. Therefore, I’ve decided that there will be no more loans.
    There have been a couple financial crisis among family but I have just given money rather than a loan. It’s so much easier on the nerves and relationships.

    Reply
  2. Barbara says:

    If I can afford to, not very often, if friends, or family ask me for a loan, I tell them it’s a Gift. And to “pay it forward”. Do a kindness for someone, give of Themselves!! Usually I know in advance they Will Not be Able to pay it back in cash. My cousin was fired from her job, just before Christmas. She has two beautiful daughters and no savings. My Gift brought them Christmas and I get prayers every night.

    Reply
  3. Jeff Nichols says:

    Alright Mary, I love your column, and I’ve used your advice on products and recipes for many years! But this time you’ve missed the boat. In the past, I have lent money to friends, and rarely has it turned out well. Remember, the borrower is servant to the lender? So now I absolutely refuse to loan money to anyone. Friend, family, neighbor, doesn’t matter. Now there have been several instances where I have been approached by people asking for a loan. Again, I never give them a loan. However, there have been many circumstances where someone is doing the right thing, and making the right decisions, and they just need some help. In these cases, I will GIVE them the money and tell them to pass it on to someone else someday who is having a hard time. Then I stress that I do not want the money repaid back to me. This has worked perfectly. And based on what I’ve seen through other people and friends, has saved me lots of headaches and grief.

    Reply
    • Jenners says:

      Jeff,
      I think Mary would agree with you about not lending money. Remember, she starts with the advice to not lend more than you are willing to give as a gift. BUT she knows quite well that people are going to do this anyway, so she is doing her best to help us do it wisely.
      I live in a culture where people borrow money all the time, and wish someone had told me from the get-go what you have learned — better to give a gift than lose a friend! Even if what I give is much less than the loan they requested, the fact that it comes with no strings attached cements rather than destroys the relationship.

      Reply
  4. Theresa Reed says:

    I took a course called Financial Peace University lead by Dave Ramsey. He stated in the class video that when you decide to loan to anyone do so with a mindset that it is a gift and don’t expect repayment. Think about how it may affect your relationship with that person. Then our son asked for us to co sign the loan on his house. We just told him that we worked hard for our credit rating and his credit rating was not good because he was not as good at managing money. We explain es we could not carry their more if they defaulted on the loan and could not co sign. Since that time he has cleaned up his credit score and is very proud how he did it and got a house loan on his own merit. I firmly believe we have to teach our children to stand on their own financially. We will not always be there to fix it for them.

    Reply
  5. Sur says:

    Yes, things were always tight while raising our kids, but I’m now in a position to be able to help them when they need it. It’s a great feeling and they have never reneged on a loan. I always have them sign a promissory note, and I charge them 5% interest. They receive a spreadsheet with monthly payment clearly outlined. I’ve also helped a sister and a nephew, with same loan plan. Everyone knows that, should I die, any unpaid balance becomes part of the estate, and still needs to be repaid, or deducted from their share of any inheritance. I have friends who are appalled that I Expect repayment from family and that I charge my kids interest But, my kids understand that this money is a blessing and that I need this to be comfortable for however long I live I’m hoping for at least another good 20 years-and they are hoping I spend it all! Best kids ever!

    Reply
  6. Susan says:

    I think the most important point is #1 – Accept Reality. I let money to my nephew who was in a bad way at the time, about to be homeless, contingent on a payout he was going to get from an estate (I knew this to be true.) The payout came, and I’ve not gotten anything. I went into this knowing I was doing a good thing, but also knowing the likelihood was 99% I would not get it back.

    Certainly I did what I could, but I’m not stressed over it because I already considered it a “gift” (would not get it back) so no stress about it.

    Reply
  7. Liz Baca says:

    Yes, we have lent money multiple times including to parents, siblings, and friends with good results. They paid back as promised. There were two occasions where we were not repaid. The first was 35 years ago. I had to take a break from working on my masters degree when we weren’t repaid. The second was to a nephew who to date has made only minimal payments. Knew there was a chance he wouldn’t repay but wanted to support his son going to science camp. I will not lend to him again

    Reply
  8. Jan says:

    Don’t lend money to your friend if you value the friendship. Something shifts when they take the money from you. We loaned over $3,000 to longtime friends. When they made no move to pay it back, we just had to accept that we’d lost the money and the relationship. It went further south when they called a year later and asked to borrow another $1,000. This was years ago but it still stings.

    Reply
  9. Marilyn W says:

    My brother suddenly took an early retirement so he could move in with our mother to care for her. I lent him $1000 since it was too early for him to collect social security.
    I lent it to him knowing that he may not be able to ever repay me but also knowing he was there caring for our mom.
    About 2 months ago, I received a check from him for $1100 (I made him take back the extra $100 he included for interest). He was able to pay me once he got his first SS check.

    Reply
  10. Tom Greenan says:

    I like the way a certain TV judge gives money to people. Let’s say the person wants $500. she will tell them “I’ll give you $250. as a gift, you don’t have to me back” but don’t ask me for money again. It’s fair to say you won’t see that person again at least for borrowing money.

    Reply
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